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ETF Sponsors, Index Providers in Uneasy Alliances

Exchange traded fund providers are starting to question the premiums for doing business with large index providers as index brand-name recognition is no longer as important.

The majority of ETFs use index benchmarks provided by companies like Standard & Poor’s, MSCI Inc and FTSE Group, but with the rising popularity of ETFs, fund brand names are starting to hold their own and companies are negotiating for lower licensing fees, writes Jason Kephart for InvestmentNews. [ETFs, Index Funds Projected to Hit $10.4 Trillion by 2017]

“The value is changing,” Mark Wiedman, global head of BlackRock ‘s iShares unit, the largest ETF provider, said at an industry conference last month, arguing that prominent ETF brands now give sponsors greater bargaining power.

At the end of the day, industry experts predict that the lower indexing fees could ultimately translate to lower expenses for investors.

“If they can use their scale to bring costs down, that’s a good thing for investors,” Todd Rosenbluth, director of ETF research at S&P Capital IQ, said in the article. “It’s a bad thing for index providers.”

Last year, Vanguard was the first ETF company to shop around as it switched out a group of MSCI index ETFs for FTSE and CRSP indices. MSCI was charging Vanguard a percentage of assets under management, so the cost of licensing increased as the fund’s gained in popularity, which prevented the firm from lower costs due to its growing scale. In contrast, the FTSE and CRSP licensing agreements came with a flat fee. [Vanguard Swaps out Benchmarks on Four ETFs]

Additionally, other fund sponsors have developed in-house indices to back their ETF products. For instance, North Trust Group’s FlexShares , WisdomTree and Van Eck Global’s Market Vectors use self-constructed indices as benchmarks for their ETFs.

“If you’re in a traditional arrangement [with an index provider], there’s usually some sort of revenue sharing. If you’re a self-indexer, you won’t have that variable cost,” Shundrawn Thomas, chief executive of Northern Trust’s FlexShares ETFs, said in the article. “If you can do it at scale in a cost-effective way, there could be net benefits.”

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.